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Facts and fallacies in the ‘restructuring’ conversation

By Solomon Ukhuegbe
16 October 2017   |   3:55 am
At Chatham House, London recently, Governor El Rufai gave a lecture on the “essence of the restructuring debate in Nigeria.” This was followed in short order at the same venue by the President-General of the Ohanaeze, Chief Nnia Nwodo.

Kaduna State governor Nasir El-Rufai

It seems our national “restructuring” conversation is gaining speed without traction. Apparently everyone is talking, and everywhere. Even abroad. At Chatham House, London recently, Governor El Rufai gave a lecture on the “essence of the restructuring debate in Nigeria.” This was followed in short order at the same venue by the President-General of the Ohanaeze, Chief Nnia Nwodo. In addition, the Southwest and NADECO respectively, among others, have issued official position papers on restructuring. Yet we know little. The conversation is either short on information or it is short on clarity. I suggest both. The fault lies partly in the grammar of our conversation. Hence the conversation may not be mutually intelligible. This is surprising given that Nigeria has a long association with federalism, the central subject of this conversation. Not only is Nigeria the only one of the many British colonial experiments with federalism in Africa that survived in any form beyond a few years, there is a strong sentimental attachment to federalism in Nigeria. It has acquired a practical status of what political scientists call a non-bargainable issue. Given all that, it is surprising that there is little popular understanding of federalism. The political elite and the intelligentsia fare only one notch better than the mass public. The deployment of federalism messages in the conversation so far reads more like scripture, cryptic and complete with doomsday scenarios and apocalyptic visions.

One of the challenges of our national conversation is that “restructuring” is now a metaphor for almost anything. However, since its usage is typically associated with the federalism question, I shall limit myself to that. I propose in the essay to improve the grammar of our “restructuring” conversation by conceptual clarity and terminological precision. In spite of the enthusiasm it has generated, restructuring by itself may be insufficient to achieve the objective of improving our federal system. In what follows, I shall expose ten common fallacies prevalent in our conversation. By “fallacy,” I mean a mistaken belief or idea. Although any argument grounded on a mistaken belief or idea is necessarily unsound, I shall avoid addressing specific arguments in order not to create an unnecessary distraction or allow unintended meanings to be read into my position. Exploding of these fallacies will improve the grammar of our conversation. But it is not sufficient. Simply rearranging the deck of federal structures (“restructuring”) will not take us far. Federalism, as Daniel Elazar has observed, “is as much a matter of process as of structure” (Elazar, 1987:67).

This is a preliminary essay. I have not considered justice issues (resource ownership, access to public goods, citizenship, historical grievances and so on) or substantive issues of constitutional reform. There is no shortage of viewpoints on any of these. But framing them as necessary attributes of federalism puts the concept of federalism under stress. The first and second parts of this essay shall consider fiscal and political decentralization respectively. The former subject is dominated by economists (a subfield of public finance) and the latter by political scientists. The third part shall consider the neglected process side of federalism. I shall not offer any restructuring template of my own in this essay. High expectations combine with pessimism in the public mood. Expectations are unduly inflated by enthusiasts. As bargaining a solution will require compromise and consensus, the problem of coordination and other transaction costs will ensure that whatever can be achieved will necessarily be short of a perfect solution. The problem of coordination arises because the people usually acquiesce in a stable and effective constitutional order, thus raising the cost of getting them to agree to do things differently. Perhaps then we should focus the conversation at the margins, for that is only where the chances of consensus are good. Finally, in this essay, I shall refer frequently Kenneth Wheare’s classic on federal government to falsify certain claims bandied about as truths. Although the Australian academic died nearly four decades ago and the final edition of his work (1964) barely mentioned Nigeria, he was enormously influential and contributed more than anyone else to a narrow, legalistic (institutional) approach to the federalism concept. Wheare is the patron saint of “true” federalism, if ever there was one.

FALLACY 1. Nigeria does not have a federal constitution.
This claim is stated in different words. Sometimes, it is claimed that Nigeria’s federal constitution is a façade masquerading a unitary constitution. Some others have called for “refederation,’ meaning a federation no longer exist. Everyone agrees that up to and including 1965 Nigeria operated a federal constitution, the Constitution of 1963. Wheare famously defined the “federal principle” as, “the method of dividing powers so that the general and regional governments are each, within a sphere, coordinate and independent.” Whether or not the two governments, as we shall see, are independent or interdependent, they are without a doubt required to be coordinate (equal), in that one is not subordinate to other in every matter. Thus, Nigeria was a federation in name only during the military dictatorship because the central government was supreme in all matters. But the Constitutions of 1979 and 1999 restored the equality of the States with the central government in their allotted sphere (matters to the extent listed in the 2nd column of Part II of the Second Schedule and unlisted matters): section 4(7).

The 1979 and 1999 Constitutions are without a doubt more centralized that the 1963 Constitution, but, conceptually, the existence of federalism is not determined by how much powers are enjoyed by the central government or by the subnational government. “The important point,” Wheare wrote, “is whether the powers of government are divided between coordinate, independent authorities or not. …This difference is what is fundamental, and this is the difference that provides the real distinction.” The per genus et differentia definition of federalism or a federal constitution is no more than this. If the central government is subordinate, then the polity is a confederation; if the subnational government is subordinate, it is a unitary system, even where there is considerable devolution of power. Spain, for example, cannot be considered a federation even though it has highly autonomous subnational regions because their powers can be withdrawn by the central government, which alone has the power to make constitutional changes, and, even without that, may in certain circumstances suspend the autonomy of a region. (For instance, with the crisis following this week’s referendum, the Spanish government may, invoking section 155 of the Constitution suspend the autonomy of Catalonia.) As William Riker put it, at least a single exclusive power assigned to the central government or to the subnational government is required to qualify a polity as federal.

As federalism is a question of WHETHER powers are divided between two (equal and “independent”) tiers of government, not HOW or WHICH powers are divided, the Constitution of 1999 is a federal constitution.

FALLACY 2. Nigeria does not practice true federalism.
When we think about concepts that have physical referents, it is possible, for example, for even a non-taxonomist to say, correctly, that a shrub is not a tree, or at least not a true tree. Although this claim may appeal to novices, federalism, like other political concepts, does not have a true type. The closest to achieving this was Wheare’s much-criticized attribution of primacy to the American model because, as he put it, “the federal principle has come to mean what it does because the United States has come to be what it is.” But he conceded that the three other major federal constitutions examined in his pioneering, path-breaking comparative work differed from the American model in important details. Ever since scholars have stressed the importance of moving beyond the American model. As Thomas Franck, for example, observed, the variations of federalism suggest “that the content of a federal arrangement need not be governed by a historically fixed pattern, [and] that the concept of federalism is malleable enough to bend with realities.” While I hesitate to accept that federalism has become an essentially contested concept, I agree with Ronald Watts, Canada’s leading federalism scholar, that, federalism is a “broad umbrella concept.”

Even if we consider the American model pure federalism, as we shall see, most of what is claimed for pure federalism in the ongoing conversation has little or no bearing with that model but instead John Calhoun’s state sovereignty-centred theory of the United States Constitution that petered out in the nineteenth century.

Perhaps no theme is as persistent as the ubiquitous question of as revenue sharing and natural resource ownership/control. Many related issues are grouped under the rubric “fiscal federalism” in the conversation, which is understood to be some unalterable ideals of federal fiscal relations. Nothing of the sort exists. The fiscal framework of a federation may take any of several forms. As Wheare conceded, “…the final test of the system of public finance in…federations is not, it must be emphasized: Does it produce or preserve federal government? But, Does it produce good government?” Revenue sharing probably ranks as the most significant grievance in our political system and is also among the most intractable problems. The eight ad hoc fiscal commissions appointed between 1946 and 1980 were unable to provide an enduring solution. Neither has the present permanent fiscal commission, the Revenue Mobilization and Fiscal Commission, been able to do so during the last thirty years.

The surprise is that fiscal federalism as a sub-field of public finance (economics) has as its primary consideration efficiency rather than justice/entitlement. The technical label “fiscal federalism” is apparently a misnomer, as the principles are applicable to any system of devolution of responsibility to subnational units, whether federal or unitary, including municipalities. Thus, the use of the term in popular conversation is almost always not in the technical sense. Fiscal federalism is an economic theory that considers a decentralized system superior in providing public services. The foundation of the theory is the Decentralization Theorem, which states that: “…in the absence of cost-savings from the centralized provision of a [public] good and of interjurisdictional externalities, the level of welfare will always be at least as high (and typically higher) if Pareto-efficient levels of consumption are provided in each jurisdiction than if any single, uniform level of consumption is maintained across all jurisdictions” (Oates 1972: 54). Thus, for reason of efficiency, expenditure for the provision of public services (e.g. health, education etc.) should preferably be at the subnational level (states, local government or municipalities). This requires the transfer of resources from the central government to these other levels, and may take the form of conditional and unconditional grants.

The central government is best suited for macro-economic management and income distribution as well as provision of public goods that have national application (e.g. defence), but it will of necessity intervene where a local action results in negative interjurisdictional externalities and spillover effect. For example, an epidemic or a pest infestation spreading or capable of spreading between jurisdictions or environmental harm, require national action. So, it is incorrect to conclude that the central government should have no role in health and agriculture, for example. Moreover, the central government may use its spending power (Items 1(b) and 2 of the Concurrent Legislative List) as leverage to participate in matters reserved by the Constitution for the subnational units. A comparative study by Ronald Watts (1999) of the spending power found this a common feature of all federations.

In practically all federations the most important revenue sources are controlled by the central government. We know this because almost everywhere the gross income of the central government exceeds the combined gross income of all the subnational units. The financial superiority of the central government in a federation was observed long ago by Wheare, and it is still profitable to quote him in extenso.

“…the general governments have become incomparably the more powerful financial authorities in their financial systems, and the regional governments have been able to perform the functions allotted to them upon this basis of division in their financial resources. Do the general and regional governments live on their own or do they depend on each other? The short answer to this question is that the general governments have been able to acquire sufficient resources under their control to perform their functions, but the regional governments have come to rely on grants from the general government. They have accepted, in varying degree, some measure of financial subordination to the general government.”

FALLACY 3. The revenue sources controlled by the Federal Government are excessive.
This issue goes to the heart of the controversy over the vertical sharing of the revenues in the Federation Account. That question, however, must be considered separately from the issue of central collection of certain revenues. Since those revenues are credited to the Federation Account rather than the Consolidated Revenue Fund of the Federation, the central government is technically a tax-collecting agent for all the governments of the Federation who are the beneficiaries. Subnational units have a disadvantage collecting broad-based and mobile base taxes, and applying a national tax base usually creates locational inefficiencies. Collection of such taxes by the central government is more efficient. Value Added Tax (VAT), for example, is centrally collected in most (though not all) federations and is harmonized as a single consumption tax levied centrally, except, prominently, Canada, Brazil and India (where, however, since 1 July 2017, the government has harmonized some twenty state and federal consumption taxes into a single Goods and Services Tax collected by the vendor, who remits the applicable shares directly to the central government and the appropriate State(s) respectively).

In contrast, residence-based taxes (e.g. personal income tax) and benefit-based taxes (e.g. property tax) are efficiently collected by subnational units. Thus, States in Nigeria collect AND KEEP personal income tax of residents (except the police and the armed forces) in their territory. With an expanding economy, as more efficient assessment/collection mechanisms are deployed, this revenue source will dwarf natural resource rent.

FALLACY 4. States should keep their revenue sources and be required only to contribute to meet the cost of running the Federal Government.
There is no federation where the income of the central government is derived from contributions by its constituent units. None. By the definition of federalism, the central government, as well as the subnational government, are required to have their independent sources of revenue. In a federation, unlike a confederation, the central government has direct jurisdiction over the people through its laws and instrumentalities and can levy taxes directly on the population. Any federation where the income of the central government is confined to contributions for the subnational units will not long endure. We know this from experience because it was the fate of the West Indies Federation. Section 93 of its Constitution (The West Indies (Federation) Order in Council 1957) required member territories to make certain financial contributions for each of the first five financial years, during which period the Federal Legislature was prohibited by the Constitution from levying taxes on incomes and profits. The federation collapsed even before the five years ran out. The University of West Indies is almost the only memory left today of that federation.
Even assuming a federation could survive on contributions levied on the constituent units, there is no practical way to enforce the obligation besides the option of expulsion of a defaulting unit. As that is naturally unlikely, there will be no incentive to make the payment and the federation will be burdened with a free rider problem.

The central government’s 20 percent share of petroleum royalties in the 1963 Constitution is sometimes mistaken for payment by the affected Region to the Federal Government. It was, in fact, the latter that collected the petroleum royalties and paid out a share of 50 percent and 30 percent respectively to the petroleum-producing Region(s) and the Distributable Pool. The language of section 140(1) of that Constitution is clear: “There shall be paid by the Federation to each Region….”
Finally, there is no example of a federation where a constituent unit has more income than the central government.  That would be an asymmetrical federation that will not endure. Take California, for example. It was the thirty-first State to be admitted into the United States and the most populous. It is far richer that any other subnational territorial entity in the world. In fact, its economy is larger than all but five countries. But the United States economy is nearly eight times larger California’s. As we have noted, the ownership of natural resources, especially mineral resources, counts prominently among the contentious issues in Nigerian federalism. Professor Nwabueze has argued that, “Fiscal federalism requires that ‘mines and minerals including oil fields, oil mining, geological surveys and natural gas’ should be a residual matter within the exclusive competence of the Regions or States. Power with respect to these matters should be expunged from the Exclusive Legislative List and be made a residual matter in accordance with the requirements of true and fiscal federalism” (Vanguard newspaper, 30 Sept. 2017). The truth is that this matter has remained exactly where the Constitution of 1963 placed it. It was item 25 of the Exclusive Legislative List of the 1963 Constitution, commonly accepted as a “true” federal constitution. In addition, centralized management is preferred in federations where petroleum rents are a substantial share of national income. If it was wise to assign competence over this subject to the centre at a time when petroleum was a minor contributor to national revenue, it can hardly be otherwise now it has become the main pillar of the economy.

FALLACY 5. Distribution of revenues generated in any state to other states is contrary to federalism (Robbing Peter to pay Paul).
The distribution of revenues is inevitable in federations. Some of the payments are equalization grants (or equalization is a factor in revenue distribution, as with art. 107 of the German Constitution). Some others are conditional grants for specific purposes. In fact, one may say, far from being antithetical to federalism, redistributing resources from richer regions to the poorer regions has become one of the functions of federal government everywhere (the United States excepted).

“As Wheare observed, the central government can exploit the richer areas for the benefit of the poorer. What wealth there is, they can seek out. Whereas the government of a depressed region, with great demands for social services, and correspondingly small resources to meet them, is confined within the area of its own territory for the resources it may tap, the general government can rage over the whole field. One function which the general government of a federation is coming increasingly to perform, rightly or wrongly, is the redistribution of the wealth of the whole country, taking it from the more prosperous regions and giving it to the poorer.”

Germany has a unique Peter-to-Paul horizontal equalization transfer (Länderfinanzausgleich, or LFA), whereby revenue is transferred from the richer subnational units to the poorer by a mechanism of equalizing their financial capacities under article 107(2) of the German Constitution, which mandates legislation that “shall ensure a reasonable equalization of disparate financial capacities of the Lander, with due regard for the financial capacities and needs of municipalities.”

Although everywhere there is a net transfer of revenue from the richer regions to the poorer regions, the former generally resent it. It should surprise no one that this is also the case in Nigeria as well. The derivation entitlement in the 1999 Constitution (13 per cent) is only a third of what it was in the 1963 Constitution (50 per cent). However, context is important. Petroleum rents was not significant until especially the early 1970s. Fifty per cent entitlement was probably no longer realistic in the new circumstances without creating a radical horizontal fiscal asymmetry (between States). Even with 13 per cent, the 2017 Q1 revenue allocation shows, for example, that the N75.44 billion gross revenue allocated to Akwa Ibom is three times that of Kaduna and more than twice Kano’s. It is four times that of Cross River and five times Kwara’s. So, contrary to the popular perception, the derivation factor currently has a significant impact in the horizontal distribution of revenue (between States) in Nigeria. Nonetheless, today, with petroleum revenue barely half of the Federation Account, it is tempting to experiment with progressively increasing the percentage of the derivation entitlement, possibly even up to 50 percent.

FALLACY 6. Federalism requires that States develop at their own pace.
Without doubt every subnational unit of a federation cannot develop at the same pace. Lagos State, for example, is developing at a greater pace than Gombe State. What is not true, however, is to deny that the central government may legitimately intervene to ensure that the provision of public services (health, education and so on) in every State is at a comparable level. That is an imperative of national citizenship. Some federal constitutions expressly affirm this obligation (e.g. Canada, s. 36(2); Germany, art. 72(2)).

The alternative scenario is that, as long as there is unhindered mobility of citizens, the population will move from poorer States to the States with better public services, thereby passing the financial burden for providing these services to the well-off States.

FALLACY 7. Allocation of revenue to States from the Federation Account is feeding-bottle federalism.
This reflects a misunderstanding of the mechanism. The Distributable Pool Account is one of the enduring legacies of the Sir Jeremy Raisman Commission (1958). It has been incorporated in every Nigerian Constitution since. The Federation Account is not an account of the Federal Government. The Constitution itself (s. 162(1)) says,
“The FEDERATION shall maintain a special account to be called the Federation Account.” As we have previously noted, the Federal Government acts as the agent of all the governments of the federation in collecting revenues constitutionally designated for the Federation Account (practically all the revenue collected by the Centre). Revenue sharing of this kind is a feature of all federations the United States excepted. In Nigeria, as in many other federations (e.g. Australia, Austria, India, and Germany), this transfer is the most important source of the income of the subnational units. In India, for example, States are chronically dependent on transfers from the Union government. One study concluded that, “the States are always looking to the Union Government for transfer of the resources. They prepare their budgets after the budget of the Union Government is presented because the States know this determines how much Central resources will be available to them” (Gill, 2013:230-31).

Fiscal imbalance is inherent in federations. “As a rule, federal governments tend to collect most taxes while state and local governments are responsible for more expenditures than can be financed from sources of revenue directly under their control” (Bird & Tarasov, 2004: 77). In addition, the central government is better able to borrow. The tendency is for it to be fiscally dominant in all federations. In Australia and Austria, for example, the federal government controls all the important sources of revenue. The vertical fiscal imbalance in federations is closed, to some extent, majorly through revenue-sharing, or intergovernmental transfers from the centre. Without revenue sharing most of the States in Nigeria will clearly be unable to deliver but the barest public services. Of the four major inflows into the Federation Account (petroleum rents, customs revenue, company income tax, and VAT), all but VAT were centrally collected before 1966. VAT did not exist until 1996. If States levied their separate VAT or sales tax, a “race to the bottom,” with States competing to lower taxes to attract investors and consumers, is unavoidable, and the administration of the taxes will be characterized by double taxation.

Professor Nwabueze has bought into the popular perception that the monthly meeting of the Federation Account Allocation Committee (FAAC) amounts to State Governors going “cap-in-hand, as it were, to Abuja for their share of the money in the Federation Account.” If the Abuja venue of the meetings is what is objectionable, there is no reason why other venues around the country cannot be used or, for the sake of neutrality, even Accra or Lomé. Or better still, perhaps in our increasingly digital-complaint society, inexpensive virtual meetings could replace Abuja meetings as long as account inflow disclosures and reconciliation can be effectively achieved. The cap-in-hand metaphor is a bit over the top way to describe the disbursement of legal entitlements under the Allocation of Revenue (Federation Account) Act. German scholars, in contrast, consider Lander share of centrally collected revenues in Germany as own-revenue of the subnational units rather than a grant from the central government.  This is justified by the fact that the share cannot be unilaterally varied by the central government. However, Professor Nwabueze objects, correctly in my opinion, that, since section 162(3) of the Nigerian Constitution grants the central government the power to prescribe the terms and manner of sharing the revenue in the Federation Account, it puts the share of the States completely at the mercy of the Federal Government. In practice, it is the Revenue Mobilization Allocation and Fiscal Commission that reviews the revenue allocation formula, on the basis of which the President presents legislative proposals to effect it to the National Assembly.

Although there is a representative from each State on the Commission, the President is not specifically required to consult with the States before making an appointment. Combined with the fact the National Assembly is an instrumentality of the central government, Nwabueze is correct in principle that, section 162(3) “is a somewhat over-bearing power in a federal system.”

The vertical and horizontal distribution of the revenue is according to a statutory formula put in place for the time being, and not simply something left to the whims and caprices of the centre to distribute as it pleases OUTSIDE THE LAW. Of course, it is not like a salary. There will always be fluctuations in inflows into the Account. Yet, section 162(3) is imperfect in its present form. In contrast, section 140 of the 1963 Constitution specified the respective shares of each Region in the Distributable Pool. In addition, section 164 required that, “The Government of the Federation, ACTING IN CONSULTATION WITH THE GOVERNMENTS OF THE REGIONS, shall from time to time appoint a Commission to review and make recommendations with respect to the provisions of sections 140 and 141 of this Constitution.”

The 1963 federal Constitution though long dead is experiencing romanticization of sorts among our political elite, with even apparently serious calls for its resurrection. Professor Nwabueze’s statement last week that, it “may fairly be described as a model of true federalism” deserves careful consideration. Nwabueze is not only the nation’s leading constitutional expert, he is the only one alive, I think, who authored a constitutional law textbook on that Constitution. However, there are certain aspects of the federation under the 1963 Constitution that can no longer be replicated. For example, the disproportionate size of the Northern Region (landmass as well as population) created an asymmetric federalism, which necessarily ensured that the Region, and a fortiori the periphery, was strong relative to the Centre. As John Stuart Mill observed, in such a situation, the oversize Region “will insist on being the master of the joint deliberation” (Mill, 1862: 322). Federations with one or a few disproportionately large or economically powerful subnational units are likely to be stronger at the periphery than a federation with numerous medium or small units, such as Nigeria today. Also, the existence of strong regional parties enhances and secures the power of the region vis a vis the centre, especially where national parties rely on regional parties to form the government at the centre. We see that, for example, in India and Pakistan.
The old Northern Region is today broken into twenty units (including the Federal Capital Territory). Although a return to the old Regional arrangement has been advocated by some, no one has provided a roadmap for recoupling the old Regions. Some have suggested using the existing six geopolitical zones in place of the old Regions. That itself is a major modification of the 1963 model, with the North split into three and the South more or less retaining its previous three-unit structure. The Yoruba nation has suggested a multi-layer federal structure of Centre, Regions and States. There is no precedent of a successful experimentation with this naturally complicated model.

FALLACY 8. The 1999 Constitution transferred to the Exclusive Legislative List several important powers from the Concurrent Legislative List of the 1963 Constitution.
The truth of this claim is mostly taken for granted. However, it deserves to be taken seriously not the least because it is shared by Professor Nwabueze, who wrote recently, “the intrusion of absolutist military rule for 28 years after 1965 has brought about the accretion of a vast amount of additional powers to the Centre over and above what they were under the 1960/63 Constitutions, resulting in the system being turned virtually into a unitary system.” We have earlier acknowledged that centralization under military rule left its fingerprints in the Constitutions of 1979 and 1999. However, the picture one gets when the Constitutions of 1963 and 1999 are closely compared is not the Tectonic shift that is widely reported.

The only matters moved from the 1963 Constitution’s Concurrent Legislative List to the Exclusive Legislative List of the 1999 Constitution are: arms and ammunition, bankruptcy and insolvency, census, commercial and industrial monopolies, combines and trusts, drugs and poisons (designated by the President by order), fingerprints, identification and criminal records, labour and trade unions, prisons and other institutions for the treatment of offenders, promotion of tourist traffic, quarantine, registration of business names, and evidence. Police was never on the Concurrent Legislative List On the contrary, the 1963 Constitution, section 105(4), stated clearly, “Subject to the provisions of this section, no police forces other than the Nigeria Police Force shall be established in Nigeria or any part thereof.” The only exception permitted was native authority and local government police, and this could only be established for a province or a part thereof and not a Regional police. In the event, there was no local government police in the Eastern Region.

Two observations are inescapable. First, the failure of quality public services delivery in almost every State today is not a result of lack of legislative competence. •

Ukhuegbe is a Benin City, Edo State-based legal practitioner